Point's future is up to Annapolis

The Baltimore Sun

The global economy has done its part: Russia's OAO Severstal has agreed to buy the Sparrows Point steel mill and invest in badly needed upgrades.

Now Maryland politicians should do theirs. If they insist on steeply taxing Sparrows Point's steelmaking process - the upshot of global warming legislation being debated in Annapolis - all the rubles in the world won't let the Point thrive.

The governor and General Assembly seem to get how a 6 percent tax on computer services will transport Maryland jobs elsewhere. They don't get how what may be an even bigger tax might hurt a company that employs 2,500 Marylanders at good wages.

Having thought through almost none of the details, Gov. Martin O'Malley says Maryland must cut carbon emissions. So let it be written. So let it be done.

But few things produce carbon dioxide like an integrated steel mill. Soleil Securities analyst Charles Bradford guesses a carbon tax could add $25 to $60 per ton to the cost of Point steel - approaching 8 percent, even at today's inflated prices.

By all appearances Severstal boss Alexei Mordashov wants the Point to hit its potential.

Last year it operated at two-thirds of capacity. Mordashov wants to go all out. (Let's hope the U.S. economy allows him to.) And he promises to sink $500 million into a plant that hasn't seen a major capital upgrade in years.

Flush from oil and other exports, the Russians are eager to recycle their dough into places with functioning legal systems and a presumption against state confiscation of assets.

Bradford hears Mordashov is sitting on $3 billion in cash. And he's buying the Point for $810 million, not $1.3 billion, as a previous suitor had agreed to. That means there'll be that much more to invest in Sparrows Point hardware.

First up will probably be the 1930s-vintage hot strip mill. Replacing that could cost half a billion all by itself, Bradford says.

What would really put the Point in great shape is relining the blast furnace, a project due in 2014 and one that would cost hundreds of millions. Blast furnaces turn ore into metal. Without one the Point becomes a finishing plant for steel made elsewhere - one with fewer employees.

The blast furnace is also the most carbon-intensive part of the operation. (Iron oxide ore + coke carbon = steel and lots of CO2.) So keeping it in operation becomes very problematic for Severstal if Maryland adopts carbon caps.

Severstal's agreement to buy the Point under such a threat underscores its commitment to the United States. But options for worldwide steel producers broaden with their horizons, as unpleasantly demonstrated by ArcelorMittal, the Point's current owner. The company has made Sparrows Point a backup, producing steel to meet marginal demand while other, lower-cost plants run full blast.

With plants in Mississippi, Michigan, Russia, Italy and who knows where else by 2014, Severstal will be well-positioned to shift production elsewhere if Maryland costs get too high. (A blast furnace shutdown in Detroit means Severstal badly needs the Point's blast furnaces for the moment. But the outage should last two years tops.)

By several accounts Mordashov is a better sort of Russian oligarch, promoting better safety and emissions standards. But he won't hesitate to minimize expenses by producing in Russia or anywhere else he deems it expedient.

Climate change is a genuine threat. But to a large degree it must be addressed by Congress and diplomats, not small-state legislatures. Putting in carbon caps in Maryland would do zip to combat global warming; jobs eliminated in Baltimore County would be shifted to nations or states with weaker laws for all kinds of pollution.

"To some extent you'd be exporting pollution," says John Anton, steel analyst for Global Insight.

Sparrows Point has toiled for years under huge debt and pension expenses and a strong dollar, which made its steel uncompetitive globally. It's just now breaking free from all three burdens. It doesn't need a new one imposed from Annapolis.


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